M/S DBS REALTY,MUMBAI vs. ACIT-31(1), MUMBAI

O R D E R PER SAKTIJIT DEY, JM Captioned appeals by the same assessee arise out of a common order dated 22.02.2019 of learned Commissioner of Income Tax (Appeals)-42, Mumbai for the assessment years 2010-11 and 2011-12.

1. 1. Land TDR 93623 Sq.mtr. construction 2. TDR 4,78,527.75 Sq.mtr.

4. Since, the assessee was required to fund the entire cost of the project itself, the TDR granted to the assessee in a phased manner were sold from time to time to incur the cost of the project. In the process, assessee received various amount towards sale of TDR in different assessment years as under:- DRC No. Date of Issue Financial Area as Area Sold in Sale Area Year per DRC sqmt Consideration Unso sqmt received ld sqmt s. SRA/8/19/ 08/06/2019 2009-10 93,623 93,623 152,57,98,600 0 LAND & 2010- 11 SRA/957/ 11/08/2010 2011-12 22,510 22,510 53,35,24,118 0 CONSTN SRA/994/ 09/05/2012 2012-13 21,790 21,790 0 CONSTN 63,07,78,539 SRA/1035/ 20/12/2012 2012-13 12,640 12,640 0 CONSTN SRA/1056/ 16/08/2013 2013-14 8,820 5,460 35,42,98,441 3360 CONSTN 1,59,383 1,56,023 304,43,99,698 3360 Assessment Year: 2010-11 & 2011-12 5. In course of assessment proceedings for the impugned assessment year, the AO called upon the assessee to explain, why the amount received from sale of TDR should not be treated as income of the assessee in the respective assessment years. In response, the assessee submitted that since it is following percentage completion method for recognizing the revenue from the SRA project and since 25% of the total estimated project is not completed till date, TDR cannot be treated as income but has to be shown as a current liability. The AO did not accept assessee’s submissions and held that the amount received by the assessee from sale of TDR has to be added to the income of the assessee in the impugned assessment year. Accordingly, he made the additions in the respective assessment years. Though, the assessee challenged the additions before learned Commissioner (Appeals), however, was unsuccessful.

6. Reiterating the stand taken before the Departmental Authorities, learned counsel for the assessee submitted, the assessee follows percentage completion method of accounting for recognizing revenue from development of the SRA project. He submitted, the sale of TDR is integrally connected to the SRA project, hence, cannot be considered in isolation. He submitted, since SRA is not funding the project, the assessee has to incur the cost of project by utilizing the amount received from sale of TDR. He submitted, the very idea of granting TDR to the assessee is for enabling it to finance the project. He submitted, since the project is not complete even to the extent of 25%, no amount is taxable, much less, the amount received from sale of TDR, that too, without looking at the corresponding cost incurred by the assessee. Further, he submitted, in assessment year 2012-13 and 2013-14, the Principal Assessment Year: 2010-11 & 2011-12 Commissioner of Income Tax had passed orders under section 263 of the Act directing the AO to assess the amount received by the assessee from sale of TDR. He submitted, the reasoning based on which Ld. Pr.CIT issued the aforesaid direction is identical to the reasoning of the AO and learned Commissioner (Appeals) in the impugned assessment years. He submitted, while deciding assessee’s appeals challenging the orders passed under section 263 of the Act, the Tribunal has not only accepted assessee’s method of revenue recognition following percentage of completion method but has also held that the amount received from TDR by the assessee cannot be valued. He submitted, the Tribunal has also held that the amount received from TDR is not taxable at the hands of the assessee. Thus, he submitted, the issue in dispute is squarely covered by the decision of the Tribunal in assessment year 2012-13 and 2013-14.

7. The learned Departmental Representative, relied upon the observations of the AO and learned Commissioner (Appeals). She submitted, the amount received from sale of TDR has to be taxed in the year of receipt.

8. We have considered rival submissions and perused the material on record. Undisputedly, the issue arising for consideration is, whether the amount received by the assessee from sale of TDR granted in respect of the SRA project is taxable in the year of receipt or the assessee’s method of revenue recognition following percentage of completion method is acceptable. Notably, the assessee has received certain amount from sale of TDR in assessment years 2012-13 and 2013-14 as well. While completing the assessment for these assessment years, the AO accepted the method of accounting followed by the Assessment Year: 2010-11 & 2011-12 assessee. However, in exercise of jurisdiction under section 263 of the Act, the revisionary authority held the assessment orders to be erroneous and prejudicial to the interest of the revenue, since, the AO failed to tax the amount received by the assessee from sale of TDR. While setting aside the assessment orders, learned Pr.CIT directed the AO to assess the amounts received from sale of TDR. However, while deciding assessee’s appeals challenging the aforesaid direction of learned Pr.CIT, the Tribunal in and 3035/Mum/2018 dated 08.03.2019 held as under:- “11. We find that the Learned Commissioner of Income Tax in this case has heavily relied upon assessment order of the assessee for assessment year 2014-15. He has also referred to the submissions in AY 2014-15, Relying upon the finding of the AO in assessment year 2014- 15, Ld. CIT has passed an order under section 263 of the IT Act. In this order he has observed that assessee has not offered income from sale of capital TDR on accrual basis. He has also held that assessing officer has not examined the tax-ability of TDR.

12. We note that it is undisputed by the revenue that assessing officer has examined the issue of assessee’s method of accounting as well as issue of receipts from sale of TDR.

13. This is evident by the submission of the assessee before the AO and the Ld. CIT. Before the Ld. CIT assessee has duly submitted that following materials were submitted before the AO in course of assessment proceedings: “a) Copy of SRA Agreement b) Copy of TDR sale agreement. c) Copy of Deed of Conveyance for handing over land to SRA authority. d) Architect Certificate for percentage of work completed in respect of SRA project. e)Extract of Guidance Note on Revenue Recognition by Real Estate Developers issued by Institute of Chartered Accountant of India.”

14. It was further submitted that assessee method of accounting along with party wise details of sale of TDR made during the year was submitted before the AO. The assessee has also given following note on revenue recognition to the AO vide letter dated 17/03/2015. Assessment Year: 2010-11 & 2011-12 Under the instructions from our above client in response to details called by your good self we are enclosing/submitting herewith details as under: 1) Note on Revenue Recognition: The assessee firm follows percentage completion method for revenue recognition. The method of revenue recognition followed by the assessee is in line with the guidelines issued by the institute of Chartered Accountants of India (ICAI), which prescribed the Percentage of Completion Method for revenue recognition for real estate business. As per said guidance note, firm will start recognising revenue from construction and development of the project only, in case all the following condition are simultaneously satisfied: a) All the critical approvals necessary for commencement of the project have been issued; b) At least 25% of the construction cost and development cost (excluding cost incurred in relation to acquisition of land) is incurred): c) At least 25% of the saleable project area is secured by contracts or agreement with buyers; d) And at least 10% of the total revenue as per the agreement of sale or any other legally enforceable documents are realised at the reporting date.

2. We are enclosing herewith copy of the architect’s certificate as Annexure 1. Which certifies that the project has reached only 11% completion of the SRA Project as on 31/03/2012. Accordingly, revenue will be recognised in the year in which the assessee firm fulfils the above threshold criteria.

15. For A.Y. 2013-14, the assessee had given following detailed submissions to the ITO vide letter dated 30.11.2015, submitted at pages 24 and 25 of the paper-book. Under the instructions from our above client and in response to the details as called for by your goodself in the previous hearing, we are herewith enclosing/submitting the following details: 1. Copy of Lease Agreement with Pawar Charitable Trust is enclosed herewith as Annexure 1.

2. Copy of Project Status Certificate of Orchid hills situated at Chandivali, Andheri as on 09.05.2013 of an independent architect is enclosed herewith as Annexure 2.

3. Copy of Partnership deed of the assessee is enclosed herewith as Annexure 3.

4. Details of Interest income with supporting documents is enclosed herewith as Annexure 4.

5. Details of Sundry Creditors in the specified format as required by your goodself are enclosed herewith as Annexure 5, Assessment Year: 2010-11 & 2011-12 6. Details of Opening and Closing stock of TDK are enclosed herewith as Annexure 6.

7. Details of TDR Sales made during the relevant P. Y. are enclosed herewith as Annexure 7.

8. Copy of Assessment Order of A. Y. 2012-13 is enclosed herewith as Annexure 8.

9. Copy of 1TR-V of all the partners of the firm is enclosed herewith as Annexure 9.

10. Note on Revenue Recognition: " The Institute of Chartered Accountants of India has issued Guidance Note on "Recognisation of Revenue by Real Estate Developers" on 11th February, 2012 in consensus with AS-9 Revenue Recognition. To follow the Guidance Note the firm has revised its policies on Revenue Recognition as follows: Revenue from construction and development of the project shall be recognized on the basis of percentage of Completion Method. The initial revenue shall be recognized after the work has progressed to the extent of 25% of the total construction cost excluding cost incurred in relation to acquisition of land and its development rights and at least 25% of the saleable project area is secured by contracts pr agreements with buyers. Further, revenue shall be recognised out of the secured contracts/agreements only if 10% of the revenue as per the enforceable documents is realised and there is no uncertainty towards realisation of balance amount." However, from certificates received from architect your goodself will appreciate that the assessee has not reached the prescribed threshold limit upto 31st March, 2013. Hence, the assessee has not recognized the revenue.” From the above note it is clear that the issue of income and receipt arising out of sale of TDR, the detailed thereof and the method of accounting for profit recognition adopted by the assessee were duly available before the AO. Hence from the above it is evident that Ld. CIT is totally incorrect in observing that the sale of TDR and the profit method of the assessee was not examined by the AO.

16. The issue now emerges whether the method of accounting adopted by the assessee and accepted by the AO is a legally permissible one not. As per the method of accounting of the assessee the accounting method is percentage completion method. According to which the assessee offers profit for taxation after 25%/30% completion of the project. In the current assessment year, the project has been completed 11%. Hence the Assessment Year: 2010-11 & 2011-12 assessee has not offered profit for taxation. In A.Y.13-14 the projection completion is 22.65%.

17. The method of revenue recognition that is percentage of completion of method of revenue recognition has been claimed to be in in line with the guidelines issued by the institute of Chartered Accountants of India (ICAI). In fact, the assessee has duly placed reliance upon the Hon’ble Mumbai ITAT in the case of M/s Chembur Trading vs ITO 22(2) (2) [2009] 3 ITAT INDIA 818 [MUM]. In this regard we may refer to the submission of the assessee before the Ld. CIT in response to the notice u/s 263 (II) Note on Taxability of receipts from sale of TDR: a) In this respect, we would like to submit that the assessee firm has acquired/hold TDR entitlements which are allotted by Government/SRA and not otherwise. The said TDR are for the purpose of the project which is loaded with heavy charge of incurring all the construction and other related expenses till the completion of the project. Thus there is no doubt that the TDR’s are directly related to the said project and sales proceeds of these TDRs are to be recognised as revenue receipt on the basis of Percentage completion method as discussed below and that to on fulfilment of desired threshold. b) The sale of TDRs does not constitute profit and the profitability of the same can be determined only at the stage when revenue will be recognised in accordance with Percentage completion method on fulfilling the desired threshold. Thus taxability of the same can be considered only at that stage. c) WE would like to inform your good self that, the assessee firm has to construct and complete the entire SRA project with its own fund. Thus the TDRs which is received/to be received is nothing but the contribution by the government to enable the assessee to complete the construction of the SRA project. Thus TDR awarded to the assessee firm are for the purpose of the SRA project the sale proceeds of which is subsequently utilised for incurring the construction cost and other related expenses till the completion of the project. d) Undisputedly, the transfer of land to SRA authority is the part of the composite agreement and sale proceeds of TDR, received on account of transfer of land, was utilised by the assessee for construction of the tenements as per the terms of the agreement. e) Further the government is determined to get these projects completed through the assessee firm and accordingly provide TDRs with a view to facilitate them to complete the projects as early as possible. The assessee firm cannot get away with the project at their own sweet will, because Assessment Year: 2010-11 & 2011-12 these matters are taken up by the public before the Hon’ble High Courts also through Public Interest Litigations ( PILs) f) We would like to submit that the assessee company is engaged into the business of real estate development. In the case of real estate developers there are mainly two kind of accounting policies for revenue recognition: i. Project completion method ii. Percentage completion method In the present case, the assessee has been consistently following Percentage completion method for revenue recognition for its real estate project since its incorporation. It can also be referred from note no. 2.7 “Revenue recognition” of the audited financial statement for the year which clearly mentions that revenue recognition policy of the company for real estate project is Percentage completion method. g) Further, reliance is placed on order passed by Hon’ble Mumbai ITAT in the case of M/s Chembur Trading vs ITO 22(2) [2009] 3 ITAT INDIA 818 [MUM] wherein Hon’ble ITAT held as follows: “The recognised method of accounting in the case of construction are mainlytwo methods: i. Project completion Method ii. Percentage Completion Method. The assessee has a right or privilege to adopt any one of the method of accounting for determining its profits.: The assessee submitted the copy of said judgment during the course of assessment proceedings Hence, the percentage completion method should be applied in the case of the assessee. h). Further, the Institute of Chartered Accountant of India (ICAI), came up with guidance note on Revenue Recognition by Real Estate Developer which prescribed Percentage Completion Method for revenue recognition. As per said guidance note, revenue from construction and development of the project will be recognised only after the work has progressed to the extent of 25% of the total construction cost excluding land cost and other parameters are fulfilled. The total project work completed up to March 31, 2012 is 11%. Accordingly, revenue will be recognised in the year in which the firm fulfils the desired threshold. The assessee submitted the Architect certificate for percentage of work completed as on 31-03-2012 in respect of SRA project.

18. We further note that the method of accounting and the accounting of receipts from TDR were duly disclosed in financial statements. We also find that assessee has been following this method of accounting consistently from earlier year. In this regard revenue has not found any defect and the Commissioner of income tax is placing great reliance on Assessment Year: 2010-11 & 2011-12 the assessment order of 2014-15. In the said order the assessing officer has held that percentage completion method adopted by the assessee is not applicable on the sale of TDR. The AO also held that the accounting method adopted by the assessee cannot over right the provision of the income tax Act.

19. In this regard we note that the AO has further referred to the guidance note on accounting of real estate transaction in case of TDR. The AO has also placed reliance upon ITAT decision in the case of Hillside construction company private Limited.

20. In this regard, we note that the observations of the revenue authority on the incorrectness of the method of accounting adopted by the assessee are not by reference to any Accounting Standards or any provision of the Act. As a matter of fact, as noted above the assessing officer has noted that the method of accounting adopted by the assessee cannot over ride the Income tax Act. Here we note that there is no specifications as to which provision of income tax provides that the method of accounting adopted by the assessee is incorrect. We find that the percentage completion method for revenue recognition in case of assessee engaged in real estate development is well recognized as per the ICAI guidelines as well as case laws in this regard. In this regard, we may refer that the Hon’ble Supreme Court explained the 'Project Completion Method or Completed Contract Method' and 'Percentage of Completion Method' in the case of C.I.T. Vs. Bilahari Investment Pvt. Ltd. (299 ITR 1) as under: Under the Project Completion Method or Completed Contract Method, the revenue is not recognized until the project/contract is complete. Under the said method, costs are accumulated in a WIP Account during the course of the project/contract. The profit and loss is established in the last accounting period and transferred to the profit and loss account. The said method determines results only when the project/contract is completed. This method leads to objective assessment of the results of the project/contract. On the other hand, the percentage of completion method tries to attain periodic recognition of income in order to reflect current performance. The amount of revenue recognized under the method is determined by reference to the stage of completion of the contract. The stage of completion can be looked at under this method by taking into consideration the proportion that costs incurred to date bears to the estimated total costs of contract.” Thus, we note that the adverse comments passed on the assessee’s method of accounting is in contravention to settled accounting principle Assessment Year: 2010-11 & 2011-12 and case laws.

21. We find that learned counsel of the assessee submission is quite germane that the sale of TDR cannot be considered in isolation of the assessee obligation under the SRA agreement to complete the slum rehabilitation project.

22. The reading of the agreement in this regard clearly shows that assessee was under obligation to complete the slum rehabilitation project as per the agreement. The said agreement has to be considered on an overall basis and the construction of the parts of the agreement has to be done in a harmonious manner. As rightly contended by the Ld. Counsel of the assessee TDRs were meant to provide finance to the assessee company to complete the project. In such circumstances the assessee has credited the amount received on sale of TDR to current liability which is utilized in the development of the project. We further note that this treatment by the assessee finds support from ITAT decision in the case of Skylark Build (supra). We may gainfully refer to the following observation of the ITAT in paragraph 8 of the said order.

8. On careful consideration of the entirety of the facts and circumstances we are of the view that approach adopted by the Assessing Officer for assessing the income from TDR independently without deducting the expenses incurred is not justified. The assessee has been following project completion method which is an accepted method of accounting in construction business and also recommended as per accounting standard AS7 of ICAI. Therefore, in such cases the income from the project has to be computed in the year of completion. The TDRs received are directly linked to the execution of the project and therefore, before the completion of the project the income from TDR or any other receipt inextricably linked to the project will only go to reduce costs of the project. Therefore, in our view the assessee had rightly set off TDR received against work-in-progress. The addition made by the Assessing Officer in 2006-07 on account of TDR receipt is not justified. Further even if TDR receipt is assessed as independent item, deduction has to be allowed on account of the expenses incurred. The TDRs have been received in lieu of handing over of constructed transit buildings and therefore, cost of those buildings has to be deducted against income from sale of TDR. The cost of the buildings is claimed to be more than income from TDR, full details of which were given to the CIT(A) and therefore, even on this ground no income can be assessed in case of the assessee. In the Assessment Year 2006-07, the project was not complete and there is no dispute about this fact. Therefore, in Assessment Year 2006- 07, TDR received has to be set off against WIP and cannot be assessed Assessment Year: 2010-11 & 2011-12 separately as income. We therefore, confirm order of CIT(A) deleting the addition made in Assessment Year 2006-07.

23. From the above it is evident that it has been recognised in the ITAT decision above that assessee’s income from TDR cannot be considered independently without deducting the expenses involved. It has also been held that TDR receipts are directly linked to the execution of the project. It has been observed that income from TDR is inextricably linked to the project and its cost. It was further held that TDRs have been received in lieu of handing over the construction buildings and therefore cost of building have to be deducted against income from sale of TDR.

24. We note that understanding of the receipt from the sale of TDR and treatment thereof as observed by the ITAT in the above case is fully applicable to the facts of the present case. Here also assessee has received the TDR in connection with the slum rehabilitation project. The assessee’s plea is that sale of TDR is linked with the assessee’s obligation to the complete the project as per the agreement. Hence the credit of the receipt from sale of TDR to current liability awaiting the discharge of assessee’s total obligations under the slum rehabilitation project is quiet an acceptable method.

25. The reference to guidance on treatment of real-estate transactions in the context of TDR barrowed by the Ld. CIT from the assessment order of the AO for A.Y. 2014-15 does not actually help the case of the revenue. It nowhere mentions that’s sale of TDR should be accounted for in complete disregard to the terms of agreement more particularly the SRA agreement as in this case, and the assessee’s obligations therein. In this regard, we may refer to the relevant quotation of learned CIT regarding accounting of real estate transaction in case of TDS as contained in para 6 of his order “6, In this regard, the guidance note on accounting of real estate transactions in ease of Transferable Development Rights is summarised as under: Transferable Development Rights (TDRs) are generally acquired in different ways as mentioned hereunder:- . (a) Direct purchase. (b) Development and construction of built-up area (c) Giving up of rights over existing structures or open land. 6.1 When development rights are acquired by way of direct purchase or on development or construction of built-up area, cost of acquisition would be the cost of purchases or amount spent on development or construction of built-up area, respectively. Where development rights are acquired by way of giving up of rights over existing structures or open land, the development rights should be measured in accordance with the principles Assessment Year: 2010-11 & 2011-12 of exchange of assets enunciated in paragraphs 45 to 47 of Ind AS 38, Intangible Assets. When development rights are utilized in a real estate project by an entity, the cost 'thereof-as arrived at in accordance with the principles stated in paragraph above should be added to the project costs. 6.2 When development rights are sold or transferred, revenue should be recognized when the following conditions are fulfilled: (a) The entity has transferred to the buyer the significant risks and rewards of ownership of development rights; (b) The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the development rights sold; (c) The amount of revenue can be measured reliably; (d) It is probable that the economic benefits associated with the transaction will flow to the entity; and (e) The costs incurred or to be incurred in respect of the transaction can be measured reliably.” A reading of the above makes it amply clear that the said guidelines duly provide that sale revenue from transfer of development rights should be recognized when the amount of revenue can be measured reliably and the cost incurred or to be incurred in respect of transaction can be measured reliably. Examining the present case on the touchstone of aforesaid, the assessee’s submission is quite germane that in the present case the cost to be incurred for the completion of the SRA project are remaining to be incurred and assessee’s obligation under SRA agreement will be over when the entire project construction is over. Hence, sale of TDR even in view of the aforesaid guidelines cannot be accounted for in isolation of the cost likely to be incurred by the assessee in meeting this obligation under the SRA agreement.

26. From the above it is abundantly clear that the method adopted by the assessee is a legally permissible one. The observation of the Ld. Commissioner of income tax while concluding his directions that “TDR is a separate right available to the assessee, the sale of which is not consequent upon construction of the revenue not the revenue recognition from its sale can be tied up with the percentage of completion of construction” is itself fallacious on the facts and circumstances of the case and also does not pass the exposition of the ITAT as in the case of Skylark above, or even the guidance note on which learned CIT is himself placing reliance. For A.Y. 2013-14, the learned CIT has similarly based his order on assessment order of 2014-15 and order u/s 263 passed by CIT for A.Y.2012-13. However, in giving final direction he has further Assessment Year: 2010-11 & 2011-12 misled himself by specifying method for accounting of TDR sale, with hypothetical example with no reference to any accounting principle or case law it is claimed to be in consonance with.

27. Be as it may, it is abundantly clear that the method adopted by the assessee and accepted by the assessing officer is legally permissible one. Once it is held that the method adopted is a legally permissible one, it has been held in the Catena of case laws that learned Commissioner of income tax cannot exercise of jurisdiction under section 263 of the act if he is of a different opinion.”